I’m Professor and Chair of the Department of Economics at LIU Post in New York. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.

Bank of America's Third Strategic Mistake

As we wrote in a previous piece, back in the mid of the subprime crisis, Bank of America (NYSE:BAC) committed two strategic mistakes that end up costing the bank dearly: the purchase of Countrywide Financial and the purchase of Merrill Lynch.

Last week, the bank committed a third strategic mistake, announcing a $5 monthly fee for its debit cardholders. While this fee is a way for the bank to offset the loss of revenues caused by the Durbin Amendment of Dodd-Frank Act (a reduction in the fee banks can charge merchants from 44 cents to 24 cents per transaction), it may end up hurting the bank in the long run.

Rushing to improve its top line, BAC’s leadership commits a common mistake large corporations make: taking the customer for granted, holding the belief that whatever products or services they offer are unique and indispensible, so their customers will always be there.

While this theory applied in the old days when corporations were the center of the economic universe and customers had limited options, it doesn’t apply in today’s markets where customers have a variety of options. For example, McDonald’s (NYSE:MCD), Research in Motion (NASDAQ:RIMM), Cisco Systems (NASDAQ:CSCO), Hewlett-Packard (NYSE:HPQ), and Netflix (NASDAQ:NFLX) that have made such a mistake in the past suffered the consequences; their top and bottom lines contracted, as consumers fled to competitors; and their stock headed south.

We do believe that the same fate awaits Bank of America, as its customers have a variety of options: First, they can appeal to US Congress to repeal the fee, as the Dodd-Frank regulation wasn’t intended to sting debit card holders with this fee, but to make banks and merchants efficient.

Second, they can cut the card and send it back to Bank of America, moving their money elsewhere. Third, with interest rates so low, they can stay away form banks altogether. Forth, they can switch into alternatives—special purpose—debit cards like the ones issued by non-banking institutions.

The bottom line: The debit card fee may boost Bank of America’s top line in the short-run, but it may cost dearly in the long-run, as customers will flee to competitors or cut their debit cards altogether.

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I am confused about Merrill being a problem. Hasn’t Merrill turned a profit every quarter since BOA acquired them? I don’t feel like doing my research, but I am sure they are currently making a profit. No comment on Countrywide – I’m not all that hungry.

Panos, you’re very correct that the two cultures at BOA and Merrill were definitely in conflict. And while some of that is still there, it is beginning to smooth over.

Remember, Moynihan is a Boston/NY guy at heart, is partial to the Bank’s Global Wealth Mgmt and Global Banking groups and to those financial centers and its people vs. the legacy BAC culture based in Charlotte. He’s worked hard on integrating Merrill effectively.

And over time, the number of brokers and traders that think they can go it alone, have no backing of a Commercial Bank’s deposit base and engage in extremely risky activities just like the good ole days…those numbers are dwindling fast.

The guys at Merrill are starting to figure this out, even if 10 out of 10 stories hitting the press every day about BAC are unflattering.

I’ve been a BofA customer since the early 90′s. It isn’t the $60 per year, but, the principle of the thing. Taxpayer bailouts, mismanagement, etc.- this is the straw that broke the camel’s back. I am moving to a local credit union and I encourage all other banking customers to do the same thing. BofA- CU.

Not trying to change your mind, but you are aware BofA paid back all the TARP money plus hundreds of millions of dollars in interest to the Govt, right?

Unlike the American car companies who used Accounting trickery to claim they paid back their loans (without interest). I wonder if you’d ever consider an a Ford or GM car, given your reasoning on BofA?

What most people don’t understand is this fee is not only intended to replace lost revenue. It is also meant to shrink the bank.

If you study Dodd-Frank and are aware of the other haphazard and restrictive regulation being heaped on the banks (Basel III), you’d understand there’s no benefit anymore to being large. Notice I didn’t say too big to fail, but I did say large.

Moynihan is being ruthless with selling non-core businesses and ensuring the consumer banking portion, with it’s tremendous legacy costs and built-in infrastructure and support, carries it’s own weight.

Remember, BofA was the first bank to reduce the number of excessive overdraft fees due to that one Starbucks Latte that forced your account into being overdrawn. They’ve now been hit with Debit card revenue drops and already took the hit from the previous legistation on credit card interest, etc.

With those changes, the Bank has to charge other fees to keep the same levels of service and the same infrastructure.

You like branches on every corner with their big leases, parking lots and friendly faces inside, not to mention the massive call centers and internet support? You gotta pay.

And if you decide the fees are too much, so be it. The bank will shrink in response.

But good luck to you if you think credit unions and small banks are the long-term answer. It’ll feel good at first, but you’ll get a lot less in return.

A lot less, compared to what? My local bank doesn’t have a branch on every corner, but they refund atm fees from other banks. BoA charges $2/pop, plus the atms in this area charge $2 and change. That’s over $4 in savings every time you use the atm. Personally knowing the guy who opened my accounts for me helps a bit too, especially knowing that he moved to the local bank because he couldn’t handle the constant customer complaints while working at Citizen’s Bank, which is small compared to BoA, but still too big for their breeches, apparently.

The last major article I read about B of A discussed how the B of A “cross-sell” mentality was worse than annoying to the Merrill people, especially with regard to their high net worth customers. An example had been given about how the Merrill customers were required to subject themselves to the Neanderthal B of A mortgage process, and in some cases took 7 months, thus alienating these HNWI.

Establishing the $5 monthly fee is so counter to the “cross-sell” culture and just blows it apart into tiny pieces, as people who depart for this reason, almost assuredly will pull other relationships.

P.S. I also strong disagree that Merrill was a bad strategic move. The cash flows out of Merrill are supporting B of A right now and represent the only stability they have in the face of a “new world” of investment banking and trading with much lower profits, and a flattening interest rate curve which will trim NIMs.

Absolutely 100% dead on!! Strategically companies have made this mistake of “taking the customer for granted, holding the belief that whatever products or services they offer are unique and indispensible, so their customers will always be there”. As a longtime, over 25 year, customer of BOA, I have lost faith in their performance and long term viability. Moves like this make me think the bank is headed for trouble as it is 1) a rookie mistake and 2) a reactive move not a strategic move.

I hope that the bank has some attrition plan moving forward as this is a sing of things to come.